FCA triumphs in final round of third party rights litigation

At the end of January the Court of Appeal ruled against Julian Grout, a former JP Morgan trader, marking an end to the long running third party rights litigation that ensued from the high-profile London Whale case. Julian Grout’s case followed the judgment of the Supreme Court last year in the case of Achilles Macris who was pursuing a similar case against the FCA.

As a result of section 393 of the Financial Services and Markets Act 2000 (FSMA), if an individual is prejudicially identified in an FCA warning or decision notice, they are entitled to “third party rights”. These include the right to receive a copy of the notice, to make representations to the FCA or (in the case of a Decision Notice) the Upper Tribunal, and to request disclosure of relevant material held by the FCA. The reputational damage to identifiable individuals that find themselves facing criticism in notices issued by the FCA can be significant. It is for this reason that s393 of FSMA provides an opportunity for individuals to challenge any adverse comments before they are made public. It is a fundamental right for individuals to be able to do this as the alternative would be to have a position whereby the most significant financial regulator in the UK could be free to criticise an individual’s conduct, having a lasting effect on their career, without any opportunity for challenge by that individual.

Both Achilles Macris and Julian Grout argued that they had been prejudicially identified in the FCA’s Notices and should have been awarded s393 rights.

Background – the Achilles Macris litigation

The long running third party rights litigation stems from the FCA’s investigation into JP Morgan and the so-called London Whale, Bruno Iksil. Ultimately resulting in a £137.6 million fine for the bank in  September 2013, the FCA issued a number of notices during the enforcement process, including a Warning Notice, Decision Notice and Final Notice.

At the time of the behaviour which attracted the FCA’s ire, Achilles Macris was the head of the bank’s Chief Investment Office (“CIO”). While the FCA did not identify Mr Macris by name in its notices it did make a number of adverse comments in respect of “CIO London Management”. Mr Macris argued that these references had the effect of personally identifying him, given his role in the CIO at the time. As a result, he claimed that he should have been provided with copies of the notices served on the bank and given an opportunity to make representations prior to publication of them.

Mr Macris applied to the Upper Tribunal, which considered the question of when a person is “identified” for the purposes of s393 FSMA. The Upper Tribunal held that Mr Macris had been identified, as it held that the references to “CIO London Management” in the FCA’s Final Notice could not be anyone other than him. The FCA subsequently appealed to the Court of Appeal and again Mr Macris was successful. However, the proceedings did not stop there and the FCA appealed the matter to the Supreme Court who provided a ruling on the issue last year.

Despite the findings of the Upper Tribunal and the Court of Appeal, the Supreme Court ruled against Mr Macris. Lord Sumption’s lead judgment held that the relevant test is whether the third party was identified expressly by name or otherwise by a synonym, such as their office or job title, provided that such synonym can only refer to one individual who is identifiable from the notice itself, or publicly available information. Resorting to publicly available information is permissible only where it is used to interpret the language of the notice, rather than to supplement with additional facts.

Further guidance was provided by Lord Neuberger who stated that an individual will be identified in a notice if (i) his position or office is mentioned; (ii) he is the sole holder of that position or office; and (iii) reference by members of the public to freely and publicly available sources of information would easily reveal the name of that individual by reference to his position or office.

Lord Sumption found that none of the terms used by the FCA as synonyms for Achilles Macris had the effect of identifying him. Lord Sumption also made the important point that the relevant audience for the purpose of considering identification issues is the public at large and not an industry specific group. This determination by Lord Sumption undoubtedly means that it will be increasingly difficult for individuals to argue that they have been identified in FCA notices without being afforded their s393 rights. It seems this will be the case even in circumstances where in niche and complex financial cases members of the public are unlikely to be able to identify the individual but identification by an individual’s peers might be inevitable.

Julian Grout’s case

Despite the ruling of the Supreme Court, and the fact that a number of senior traders consequently withdrew their cases in which they had argued that they had been improperly identified by the FCA, Julian Grout proceeded to pursue his case, continuing to contend that he could be identified due to the small number of traders that worked in his relevant department.

The Court of Appeal applied the test laid out by Lord Sumption that “a person is identified in a notice under section 393 if he is identified by name or by a synonym for him, such as his office or job title. In the case of a synonym, it must be apparent from the notice itself that it could apply to only one person and that person must be identifiable from information which is either in the notice or publicly available elsewhere.” Unsurprisingly, applying this test, the Court of Appeal ruled against Julian Grout, refusing to accept that the term “traders on the SCP (Synthetic Credit Portfolio),” which was used by the FCA, was a synonym for Mr Grout. The Court held that this phrase did not identify one person, as required by Lord Sumption’s test, and that the FCA’s references were so deliberately vague they could legitimately be described as anonymous.

The Court of Appeal’s ruling in the case of Julien Grout is another success for the FCA in this long running third party rights litigation. Despite favourable decisions for Mr Grout and Mr Macris in the Upper Tribunal (and a favourable decision for Mr Macris in the Court of Appeal) the ruling of the Supreme Court has firmly concluded these cases. The decision by the Supreme Court, and its application by the Court of Appeal for Mr Grout, re-affirms the message to all individuals working in the financial markets that unless they are able to present very strong evidence that an FCA notice identifies them individually to the public at large, they will face significant difficulty in establishing and enforcing third party rights. Even in circumstances where an individual knows that it will be glaringly obvious to the financial markets that they are the individual being criticised in an FCA notice, these recent cases show that simply may not be enough to bring a successful challenge.

Had Mr Grout and his colleague Mr Macris been ultimately successful in their challenges, this would have led to a very significant burden for the FCA in having to completely change the way in which they present Notices or face dealing with what may have been a huge number of representations from individuals that were identified. Clearly, it was vital to the FCA to avoid being hamstrung in this way. Now they have decisions in their favour from the most senior courts in this country, will we see them pushing further at the boundaries of individual identification?

This article was originally published in Compliance Monitor and can be accessed here, behind a paywall.